An Empirical Study Of IPO Underpricing In SME Stock Market In China

Initial Public Offering is a process that enterprises raise funds through issuing shares to the pullic in the Stock Exchange firstly for developmenting. Initial Public Offering Under-pricing means that the closing price is much higher than the issue price in the first trading day. This phenomenon exists in the world stock market widespread, ranged from5%-80%. For our country’s stock market, this phenomenon emerged at begin, and a significant characteristic is the level of underpricing is higher than the developed countries and the world average abnormally. Such as:Chen Gong-meng, Gao Ning (2000) found the IPO underpricing is up to335%after the study of514stocks in CSI of1991-1996; Shen Yi-feng and Chen Xue-ying (2002) found the IPO underpricing is132.15%after the study of283shares in shenzhen market in1993.3-1998.6, and the IPO underpricing is81.16%in this paper which select a sample of602stocks in SME stock markte between2006.6to2012.2. All of these are existence of the vision in our market.Underpricing phenomenon can be traced back to a study report of SEC in1963, Ibboston call it as "mystery" for the first time in1975. In theory, there should not be underpricing if the formulation of the IPO price is determined based on the true value of the company and the demand conditions of the market, because a market can not be unbalanced for a long time based on the principle of general equilibrium. However, IPO underpricing phenomenon exists for a long-term indeed. After Ibboston many scholars made a profound and extensive research on this issue,and got many theories and assumptions. The major findings were:low pricing based on a theory of EMH and The transition reaction of inventors based on The efficient market. But IPO underpricing is still a problem that plagued financial academics,and economists did not give an authoritative interpretation untill now.The significance why economists and finance scholars have been concerned about the "IPO Underpricing Puzzle" is that they want gave some suggestions which can improve the efficiency of IPO pricing and the market allocation mechanism throught revealing the cause of the phenomena, so does this paper. The exceptionally high IPO underpricing has been seriously harmful to the investors and policy-makers themselves, the direct consequences are:The hoarding of huge money in the market can lead to a unefficiency and the problem that caused by the huge risk-free profits.The confidence of Investors will become weaker increasingly when they have suffered losses, contrary, the discontent will be increasing for a long run. Finally, the development of capital markets will face more difficulties, even cause political and social problems. Because that, this paper select a sample of602stocks in SME stock markte between2006.6to2012.2and make an empirical study of China’s IPO. The paper is divided into five chapters:Chapter1:Introduction, This chapter includes:the background and significance of the research、the ideas and methods of the research、the innovation and inadequacies of the paper. Firstly, we give the research significance and the necessity by descriping the IPO underpricing phenomenon a; secondly, there are the detailed description of the way and how the paper to study the problem, such as:the paper want to pay more attention on secondary market and research the issue by building a multivariate regression model based on unefficiency market hypothesis and the three "financial vision".At last, this paper give a different interpretations about the effect to IPO underpricing of the nstitutional investors inquiry under the net and the IPO lagged effect except the innovative of data acquisition.Chapter2:Literature review at home and abroad, this chapter made a complete summary of the research data ahout IPO underpricing. In the part of foreign literature review, the article divided it into two parts according to the researchers’s different sight:the interpretation based on behavioral finance theory and the interpretation based on asymmetric information theory; In the part of domestic the article highlights the research which different from foreign researchs, such as:the study of IPO underpricing phenomena based on the particular IPO system, distribution methods, as well as split share structure.Chapter3:The institutional background of China’s IPO underpricing, this chapter is divided into two parts, the first part is the regulatory system and its evolution in China,which descrip the effect to IPO underpricing through analyze its different pricing system. The other part is the system of IPO pricing and its evolution, which not only introduced many ways of IPO pricing, but also compared the IPO underpricing rates under different pricing system,which prove that make pricing system more market-oriented can reduce underpricing rates.Chapter4:An Empirical Study on IPO underpricing of SME stock market, this chapter is the main part of the paper, we make the empirical research by useing descriptive statistics and establishing a regression model. This chapter display every steps from building the model、selecteing variables to testing parameter and modifying the model,the empirical research shows that the factors which affect the IPO underpricing of SME significantly are:previous underpricing level, online subscription multiples, turnover on the first trading day, the scale of new shares and yield of30days of the market befofe new shares. The results not only revealed that the main reason for the high rate of China’s IPO underpricing is the over-react of investors in primary and secondary market, but also revealed that IPO underpricing rate is lagged significantly.Chapter5:the policy recommendations for the IPO market, this chapter firstly make a objective analysis on the current situation and the problems of China’s IPO market, after that, give some advises like create a more market-oriented investment environment、promote the reform steadily and strengthening market supervision、strengthen investor risk education, advocate rational investment behavior、rich investment products and other policy recommendations.Empirical result shows that theory of Western scholars is not fit our market. Firstly, high subscription and unsignificant underwriter prove that the theory of information transmission "and the" winners curse "(Winner’s curse) which Rock (1986) proposed is not adapt for SME stock market. Secondly, the unsignificant of the indicators of waiting period prove the inapplicability of the "time interval hypothesis. Only a variable of company size which measure corporate risk can affect IPO underpricing significantly, and is consistent with the findings of the supplementary theory by Ellul and Pagano (2003). Empirical result also show that several variables which reflect the sentiment of the investor and the positive feedback has made a good explanation, especially previous underpricing level, online subscription multiples, yield of30days of the market befofe new shares. All of these are consistent with westen scholars’ study whose based on the theory of behavioral finance. So, the main factors that led to IPO underpricing are the overreaction of investors in primary and secondary market but not the inefficiency of the market pricing.The biggest difference between this paper and other scholars is that we eliminate interference from distribution system and pricing system, and pay more attention on the market factors.The theory of the paper based on information economics and behavioral finance, the former believed that IPO price is created by the consult of issues、underwriters and investors. While the latter mainly want to prove the existence of noise traders whose irrational investment caused the mystery of IPO underpricing. The empirical results show that the westen study which based on the EMH is not suit for our markte. Our markte is young, and it is just a weak-efficient market. In addition, many restrictions on short selling, high costs of borrowing all limit the behavior of arbitrage, Therefore, the price is decided by the optimists or the supply and demand situation of the market. The price listed on the first day is not a true reflection of the true value of the stock, but a overvalued price caused by investors’ non-rational behavior, and is nothing to do with the market pricing. Therefore, in order to change the current status of IPO underpricing, the most important measures is to limit the crazy speculation in the secondary market, but also enhance the risk education to investors. As the market is becoming more and more mature and the reform of distribution system step by step, we believe that the problem of IPO underpricing in China will be resolved effectively in the near future.